Essence of Modern Money

To establish the basis for genuine Islamic alternates of current monetary system, it is essential to understand the nature of modern money. In this sequence of posts, various such elements on the nature of modern money are explored that are so far overlooked by Islamic scholars. For this, we must understand the way secular economic experts have defined money and on what grounds Ulema has accepted it as a permissible system.

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Modern economists define money in a number of varying views that are astoundingly conflicting. Therefore, no significant consensus is found about either role of money. Classical and real business cycle economists rule out any significant role of money in the real economy. On the other hand, Keynesians believe that money is a potential tool to successfully combat recessions. But monetarists argue that monetary policy has large and inconsistent time lags so, discretion is not viable to deal the economic adversity. Heterodox economists define role of money like a debt-obligation of state, as it is not backed by a valuable commodity like gold/silver. Chartlists and proponents of modern monetary theory define a radically different role of money, as a public monopoly. Contrary to convention, Stephan Zarlenga (2002) opposes private credit creation in favor of nationalization. In addition to these, several other models present a variety of insights about money in current economic system. Evidence of multiple equilibria from these models, particularly in presence of expectations is one interesting aspect, where conventional theories can explain nothing. Given this, Zaman (2014) argues that even in the simplest framework, coordinated understanding that must be agreed upon is necessarily required to determine the role of money in any economy.

Likewise, Islamic scholars also define money in several different ways. It can be a certificate of debt, or a new form of commodity or asset, or a substitute of gold/silver, or an alternate (but not equivalent) to gold and silver that measures the values of goods. There are supporting and opposing arguments for each definition, but Ulema have most consensus for the last one. Ironically, not because of conformity with Nasoos (Quran & Sunnah) but on rational to fit with needs of modern economic setup. Money from first three definitions is not compatible with the modern monetary structure. As it may not be useful for trade and not subject to interest and Zakat etc. This situation requires rethinking and understanding the aspects of money that are not yet revealed to the Islamic scholars.

Given the central importance of Zakat and Interest in Islamic economic system, compliance of money with Islamic Law can be ensured only after having a clear understanding about existing fiat money. There are several important features of money that are not accounted in before arriving at Fatwa on money. In this regard, some aspects of particular importance are discussed in detail.

First, development of a ruling on the basis of analogic method (Qiyas) may not work for current monetary structure. As it is unique in nature; nothing similar to this has ever existed in past. Second, this monetary system is consciously designed and evolved in wake of some historical incidents to meet certain objectives. This system is asymmetric and favors some segments of economy against the others Williamson (1977).

Third, the system is asymmetric even among the economies. US dollar is used as reserve currency in all world as it is given equivalence value and replacement to gold. Therefore, US can print any amount of dollars without restrictions or reserve requirements. This favor to USA have several negative implications for Muslims. Being creator of money, US can exchange paper for real resources including oil, human resources and even political and social dominance anywhere across the world. One prominent example is Iraq war that was entirely financed by printing huge amounts of dollars (seigniorage). The war would have been impossible, had rest of the world refused to accept dollars.

Fourth aspect is that printing dollars levies inflation tax on all countries that keep dollar as reserves. Therefore, USA has a privilege to earn revenue from whole world out of no effort. This huge privilege enables USA to influence and dominate entire world. As per Mahathir Mohammad, USA economy can entirely collapse if oil exporting countries stop accepting dollars. It is suspected that proposal of oil based currency by Saddam Hussein was major reason of Iraq war. Regardless of this verification, there is no other opinion about tremendous benefits USA enjoys from this system. Therefore, it can go to any length to preserve this monetary system and even fight against any attempt of change.

Fifth, mechanism of money is kept complex to avoid anyone challenging the powerful. There are several confusions about the current monetary system and complex functions of modern money. As money is used to serve the interests of powerful, they prefer to prevent world from understanding this mechanism. But massive damage from global financial crisis (2007-08) has led to interesting disclosures. One of those is significant difference in textbooks’ description of money creation and actual process.       

Given these reasons, learning about the complex nature of modern money is most important issue before having rulings of Islamic law. This poses a question on preserving a system that benefits few on cost of many. Current monetary system massively exploits poor. Hickel (2013) reports that interest payments (financed by additional loans) from poor countries to rich are approximately five times higher than what they receive from rich in the name of foreign aid. Moreover, capital flight (including repatriation from multinationals and Swiss deposits of corrupts) from poor countries to rich is worth trillions of dollars. This exploitation of poor could never happen if we had not accepted it permissible to implement modern monetary system in Islamic countries.  

Note: This note is based one first two sections of the article by Dr. Asad Zaman. For complete article and references mentioned see “On the Nature of Modern Money

Employment for all

Global experience shows that market economies create massive inequalities, enriching the top one per cent, while leaving the bottom of the population far behind. One key to prosperity is to provide productive jobs for all who would like to participate in the production process. Unfortunately, contemporary macroeconomics, which was blind to the possibility of the global financial crisis, is not equipped with the ideas and tools required to create full employment.

Conventional macro blames the poor for their poverty, and suggests education and training to fit them into existing jobs. However, the private sector does not naturally create enough jobs to employ everyone. Experience with Keynesian remedies shows that expansionary monetary policy starts to create inflation a long time before full employment is achieved. Modern Monetary Theory provides a genuine alternative, a job guarantee (JG) programme.

Instead of preparing people to fit them into existing or potential private sector jobs by providing them with education and training, we must create jobs tailored to the people. Jobs should be provided to take people as and where they are. Skills should be provided via on-the-job training. There are a huge number of jobs which require low levels of skill and education, and provide enormous benefits to society, but are not profit-making for the private sector.

Planting trees, building roads, cleaning dams, infrastructure projects, a range of social services, all provide benefits to society, and make a measurable impact on appropriate measures of GNP, but may not be privately profitable. Engaging the entire working population in productive jobs is a win-win solution since it will add enormously to the economy’s productive capacity of the economy, while providing a living wage for all members of society. We must solve a complex set of structural problems to make this work.

The first problem is institutional. Just as the private sector cannot provide enough jobs, the government too lacks the capacity or capability to productively employ millions of people. Since neither the government nor the private sector has sufficient capacity, we must turn to communities for provision of jobs. Fortunately, community-driven development was pioneered by Akhtar Hameed Khan in the Comilla Project, and has been replicated across Pakistan. Both the Pakistan Poverty Alleviation Fund and National Rural Support Programmes have created thousands of living communities across Pakistan. These communities can be given the responsibility of providing productive jobs, for which funding can be provided by the government.

Next, we must examine the consequences of pumping billions into the economy by providing millions of jobs to all who wish to work, taking them as they are, where they are. A huge amount of additional demand for goods and services will be created by this additional money being paid to the formerly unemployed. Using household income and expenditure surveys which describe consumption patterns of the poor, we can come up with first-round estimates of the nature of the additional demand generated. To prevent inflation, we need to ensure that employment is provided to produce the goods for which we anticipate excess demand will be generated, eg if we forecast additional demand for a million tonnes of food, we must employ the labourers to produce the additional million.

Careful sectoral planning is needed to ensure a match between additional demands generated and the additional production that will be created. However, even if we fail in matching supply to demand, excess demand which leads to inflation is not necessarily harmful. Rising prices signal high demand and set off private mechanisms to create additional capacity to meet new demands. Large amounts of labour made available by the JG programme would facilitate expansion of supply in response to increased prices and profits.

A surfeit of money would create excess demand for imports. With an overvalued rupee, we subsidise all imports and can’t afford to increase demand, since that drains our forex reserves. However, an undervalued rupee acts as a tax on imports which creates forex reserves for the State Bank. Many economies like Japan, China, and East Asia have used undervaluation to promote domestic industries and accumulate dollars. It is true that essential imports with inelastic demands will become more expensive. However, we can use the surplus generated by undervaluation to subsidise essential imports. This dual exchange rate policy is far more efficient than a general across-the-board subsidy to all imports, which is created by overvaluation.

Many aspects of the JG programme require careful planning and adaptation to local social and institutional structure. But the payoff of prosperity for all makes it worthwhile to invest in the required efforts.

Written by Dr Asad Zaman and published in Dawn, April 24, 2019.

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Rupee Overvaluation

Popular demand to control the value of domestic currency is highly contradicting with fundamental economic facts.

Equilibrium exchange rate is the one that comes in market without any intervention. It indicates the rate at which price of currencies is justified given that demand for and supply of the currency is equal. In this situation if we demand to keep the rupee overvalued, government would have to artificially increase the supply of dollars in the market.

The policy of overvaluation of the Pakistani rupee is equivalent to an across-the-board subsidy on all imports. Anyone who purchases $100 receives $90 of it from private sources seeking to buy Pakistani rupees, while $10 comes from the government, that borrows dollars and sells them cheaply to keep the price of dollars low. Naturally, this makes imports cheaper, because the government pays part of the bill.

While occasionally it might make sense to subsidise strategic imports, it can never be sensible to provide across-the-board subsidies for all imports. Yet, in Pakistan, this is what has been happening for several decades. Governments have maintained significantly overvalued rupees, effectively borrowing dollars to subsidise all imports.

This is the simple explanation for our need to repeatedly borrow from the IMF, even though pundits pontificating on this matter have incorrectly blamed many other factors. We will examine why this has happened, what the consequences have been, and how the problem can be remedied.

One of the deadly effects of overvaluation is the establishment of negative value-added industries, which make profits only due to the existence of government subsidy on imports.

For example, our oil czars import oilseeds from Brazil and Malaysia, since it costs more to grow our own sunflowers! Worse, overvaluation prevents valuable industries from coming into existence.

Attempts at producing export-oriented silk, olive oil, palm oil, small electronics, and other light industrial products, have all faltered because overvaluation makes it extremely difficult to produce competitive products. India is able to produce domestic cars and mobiles because the Indian rupee is undervalued, making imports expensive.

Pakistani efforts have failed because overvaluation makes imports cheap. China, Japan and East Asian countries followed the opposite policy of undervaluation to industrialise.

When dollar imports are expensive, due to undervaluation, then it becomes profitable to set up domestic industries which can successfully compete with imports. Creating domestic industries which can manufacture substitutes for imports made expensive by undervaluation is a key step towards industrialization.

Undervaluation occurs when the government purchases $10 for every $100 imports purchased by the public, bumping up the price of the dollar by adding to the demand. This allows the government to transparently collect money, avoiding corruption at customs, and creating desperately needed foreign exchange reserves for national benefit.

The question is why, when it is so harmful for local development, have we pursued a policy of mass subsidy for all imports over decades. Billions of dollars in subsidies goes to select industries which profit immensely from cheaper-than-market-value imports. These industries would collapse if the subsidy was withdrawn, and the value of the Pakistani rupee were set by market forces (not the IMF!).

More generally, the wealthy classes enjoy subsidies on luxury imports. But overvaluation is defended on the ground that the poor will have to pay more, even though the subsidy benefits the rich far more.

The imaginative beneficiaries of the billion-dollar sub­­sidies promote an­­other half-truth to sup­port this disast­rous policy.

They acknowledge that additional demand will be created by lower prices for Pakistani goods, but argue that our export industries are working at full capacity and will not be able to expand production to meet the additional demand.

What they say is true in the short run — we may not see an immediate response in terms of increased exports.

In the long run, export-oriented industries could come into existence to satisfy additional global demand created by the cheaper Pakistani rupee.

However, it is costly and risky to set up industries. Putting in the required large investments in production capacity requires confidence that the government will maintain its exchange rate policies. Given the power of the overvaluation lobby, it would be hard for anyone to have such confidence, in order to set up the industry.

The domestic economy will never learn to produce if it is cheaper to import goods at prices subsidised by government borrowing.

The long-term health and prosperity of the economy requires either fair or undervaluation. The present policy of overvaluation works by borrowing dollars to subsidize imports, and cannot be sustained in the long run.

Article is written by Dr. Asad Zaman and published in Dawn News on May 19, 2019.

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History of Money

[] Radio Islam, South Africa 14m Interview of Dr. Asad Zaman by Mufti Yusuf Moosagie on Tuesday, 8 Oct 2018, at 9:30am South Africa time and 12:30am Pakistan Time

Q1: What is Money? 0:20 to 2:22

This is a deep and difficult Question. BUT WHY is it so complex?
50 people own more than half planetary wealth. They cannot exploit us WITHOUT our consent. Our consent is creating by feeding us FALSE theories about the nature of money. Today, Ph.D.’s from Harvard learn and propagate false theories which make it impossible for us to understand how the current monetary financial systems are used to exploit us.
The KEY question to ask, to unravel the mystery, is “Who has the power to CREATE Money?” We must ‘follow the money’ to find the answer. For more details see The Battle for the Control of Money.

Q2: How has the nature of money changed and evolved in the 20th Century? 2:22 to 5:18

Pre-WW1: We had the Gold Standard: technically money backed by gold, Actually, most money is unbacked. Important Note (not covered in talk) Fractional reserve means that only about 20% of paper money is backed by gold. There are proposals for 100% reserve banking – that is all paper money is backed on one-to-one basis by gold. This is what general public understands by gold standard, but this has rarely been used in past few centuries. End of Note. WW1 exhausted gold supplies at Central Banks, forcing world OFF the gold standard. Attempts to restore gold standard failed in the Inter-War Era  Bretton Woods Conference in 1944 switched from Gold to Dollar Standard, where dollars would be backed by Gold.  1971: Vietnam War led to massive overprinting of dollars, and the Nixon shock of 1971 removed gold backing from dollars. This has led to the world of floating currencies. For more details, see my post on Monetary Policy from 1914 to 1980.
The point here is that the nature of money has changed radically at least four times over the past century. Learning to protect our collective interests, and to give rulings (fatwa) about money and banking, require a deep understanding of these complexities.

Q3: What is Shadow Banking and how did it emerge in the 1990s?   5:18 – 7:10

Great Depression 1929 caused by speculation by banks led to stringent regulations, which prevented banking crises for 50 years. This caused reductions in wealth share of the extremely wealthy (see The Power of Economic Theory: Graphically Illustrated). They plotted a revolution against these regulations. This counter-revolution was initiated in the Reagan-Thatcher era (1970s), by de-regulating financial institution.(See The Keynesian Revolution and the Monetarist Counter-Revolution). The de-regulation of the Savings and Loan in 1980s almost immediately led to a huge financial crash and subsequent government bailout. However, the financial lobby was well prepared and managed to prevent the public from seeing the connection between de-regulation and financial crises. As the de-regulation process continued, it became possible to create bank-like institutions, which could create money, just like banks, but operate completely outside the realm of rules and regulation imposed on banks. This was called shadow banking – financial institutions which create money, but do not have to follow any rules, unlike real banks.

Q4: What are Financial Derivatives? 7:10 – 10:10

The Glass-Steagall Act 1935 prohibited banks from speculative activities. This was struck down in 1999, and the Commodity Futures Modernization Act in 2000 created legal permission for gambling in “futures” without regulation.  Derivatives are gambles on financial transactions. For example, a bank can bet that the mortgagor will not be able to make his mortgage payments on his loan. By selling this derivative, the bank insures itself against failure – if the mortgage loan does not pay, then the derivative will pay off. But now the bank will happily give loans to unqualified borrowers, because it can make money regardless of whether or not they pay. This is one of the reasons for the Global Financial Crisis. Making gambling legal led to a situation where real trade was around $4 Trillion, while foreign exchange derivatives – gambles on this trade – were around $18 Trillion in 2008. It the ability to create huge amounts of money for speculative gambles that led to the Global Financial Crisis of 2007.

Q5: What will money be like in the future?  10:10 – 12:50

One can speculate on what an ideal monetary system would be like – there is substantial amount of work on this topic. One simple-minded suggestion: go back to gold – this will not work, for reasons similar to why gold failed in the first place. Modern Monetary Theory provides better guidance. But the problem is that fair systems which provide for all will be strongly opposed by the rich and powerful elites running the planet for their personal pockets. (See Fear of Floating and Demise of the Dollar? for more details).

If we think pragmatically, the current system bring HUGE benefits to the US, giving them the ability to print dollars, and create money, without any limits. It is this ability which has allowed them to carry on almost continuous warfare against so many nations, and destroy Iraq, Libya, Syria, and many other countries. The harms of this unjust system are becoming clear to all and the effort is being made to create a Multi-Polar system, with Euro, Renminbi, and other currencies being equal partners with the Dollar. It is here where we have a chance to introduce our own Islamic currency, like an oil-based Dinar, or a labor-based currency.

Questions for Next Time  12:50 to 13:30
This provides a lead into our next topics like bit Bitcoins, Crypto-Currencies, and other innovations coming up, like the Facebook Libra. What is the role and significance of these, and what should our stance be on these developments? Will they help or hurt the Muslim Ummah? We will discuss these in the next session.

POSTSCRIPT: For a deeper and more technical discussion, see Central Bank History (3/5) 1914-1980s. For the previous interview, see Radio Islam Interview: Islamic Economics





Launching An Islamic Revolution in Economics

[] Final Part 4 of talk on “How Islam applies to Economics” By Dr. Asad Zaman, Ex-VC PIDE  English Re-Recording of Original 1hr talk in URDU at Econ Dept. Karachi University Monday 16th Sept 2019 — 14m Video of Part 4:

So we started this talk with the question: “(How) Does Islam apply to modern economics?”. Conventional textbooks seem to be completely unrelated to Islam. As we have seen, this is because conventional economics is about a market society based on humans lives for sale in a labor market, competition, greed, individualism, and hedonism. These values are opposed to Islamic values. Islam does NOT apply to modern economics – it tells us to reject the whole thing, and build a new economic system on entirely different foundations. Islam works on TRANSFORMING human behavior towards Cooperation, Generosity, Social Responsibility. Of course, we may object that this is too idealistic – we can never create a perfect society, where everyone acts like an angel. The answer to this objection is that Islam is concerned with PROCESS, not with OUTCOMES. That is, we are required to WORK for change, to struggle for a good society. We are not responsible to achieve success. The Prophet SAW was tasked with the responsibility of taking the Deen of Islam to all of mankind, but he was told that Guidance was solely in the hands of Allah. Similarly, we are asked to struggle to spread the ways of Islam, but the outcomes of our efforts are solely in the hands of Allah.

How can we work to create change? One effective technique is to replace conventional economics courses with radical replacements, which provide a critique of standard theories, and provide Islamic alternatives. I have developed many courses which provide alternatives to conventional courses on the basis of these principles. Before I discuss the courses, I want to provide some general advice to Muslim students and teachers of economics.

Advice to students: Students frequently become frustrated and unhappy when they learn that they have been taught false theories. It is important that you don’t give up, drop out, abandon study because all economics is based on wrong ideas. Even though economics is all wrong, these ideas are running the world today. We cannot understand what is happening in the world without learning these ideas. To have any chance of creating a viable alternative, we must understand these ideas. So we must study harder, to learn the weapons being used by the enemies.

Advice to teachers: We must teach economics in a DIFFERENT way. Don’t teach it as the TRUTH. Teach it as a theory which is used to make policy decision. Don’t focus on micro-details; how to do the calculations. Instead, understand and teach the CONCEPTS beneath the theories. See through math and technicalities, as discussed earlier. Learn how these theories are used to make policies. Teach students how to DRIVE the car, not how the ENGINE is constructed. Since the Western educational model does not teach these things, you will have to learn them on your own. My courses, described below, will provide a lot of help with them. Become a student, and learn along with your students. Use Fellow Traveller model: we are all learning together, but I am a senior learner, a little bit more experienced than the students. See my lectures on How to Become A Great Teacher for more details.

SOME NEW COURSES: As explained, I have developed alternatives to conventional courses. One of these courses is Advanced Microeconomics I [shortlink:] This starts out by covering the Hill & Myatt: Anti-Textbook on Microeconomics. The purpose is to create a link with conventional micro. The student will learn all of the basic concepts taught in conventional micro, but in a critical fashion. The textbook goes through standard theories of micro – in context of how they are USED in the real world. Explains why the theories are wrong, and why they lead to wrong policies. There is a serious question which emerges – why do wrong theories continue to be taught, even though there is huge amount of evidence against them? The answer has to with how Power shapes Knowledge. Theories which are taught serve the interests of power. Theories like Marxism are rejected and ridiculed, not because they are wrong, but because they are harmful to the rich and the powerful. As I have explained in detail, modern economic theory is really Economic Theory of the Top 1% (ET1%) – it protects the interests of the rich and the powerful, while pretending to be objective and neutral.

This is why Islam help us launch a revolution in Economics. We need to construct a theory of the bottom 90% – ET90% – which protects the interests of the weak and powerless masses, against the rich and wealthy. As a first step, we must learn to see through the deception of conventional economics. We must study conventional theories, not as an apprentice learning the truth, but as an external observer watching a magician to learn the secrets by which he deceives the public – see Thousand Snakes: Image and Reality of Western Economics.

One of the key deceptions is the WRONG model of human behavior: homo economicus. The idea that we are all selfish and greedy, and that this is rational behavior, serves to justify and allow the rich an powerful to do whatever they want. Actually, this concept is contradicted by actual human behavior. This theory is used to justify laissez-faire economics – just let everyone do whatever they want. By the ridiculous theory of the invisible hand, if everyone behaves selfishly, the society will automatically reach the best results. See Game Theory for Humans with Hearts.

The Islamic Perspective on this is that economists have the wrong model of human behavior, and also the wrong model of what makes us happy. We can create a new basis for Micro if we start by differentiating between NEED and WANT (as discussed earlier, and in greater detail in “Scarcity: East and West”). There is enough for everyone’s need, but not enough for everyone’s greed. If we make the objective the fulfillment of NEEDS, discouraging fulfilment of Wants, and encouraging people with excess to give to those who are in need, this is enough to launch a  Revolution in Economics.

I have developed new courses in Microeconomics, which are a compromise between the full ideal Islamic course, and the current neoclassical economics courses. Advanced Microeconomics I is based on using existing alternative approaches. One of these is Behavioral Economics, which studies actual behavior of human beings, instead of the axiomatic behavior which is mathematically predictable. As we have discussed, many development in Islamic Economics can be brought into the picture, to provide genuine alternatives – see Islam’s Gift: An Economy of Spiritual Development. Closely related is Experimental Economics, which engages students in real world experiments, which allows them to see that actual human behavior is very different from what economic theories say. In particular, human beings do not optimize; they use heuristics for decision making. This makes it impossible to calculate outcomes using simple mathematical formula. A solution is provided by the techniques of Agent Based Modelling. This allows us to deal with Heterogeneity (many different types of agents). Instead of mathematically calculating outcomes, we can simulate results on a computer.  This allows us to go beyond the “equilibrium” theories of economics, which belong to nineteenth century physics. Another new development discussed in our new approach to micro is Evolutionary Game Theory. This allows to model change over time, without having any equilibrium in mind.

Advanced Microeconomics II (2018): This course is based on Holt & Davis text on Experimental Economics, it examines conventional micro theories within an experimental framework. By being subjects in experiments and by running experiments themselves students learn the vast differences and contradictions between economic theories and real-world markets. Course provides students with deep intuition about real world economics which is not available by studying formulas as in conventional courses.

Similarly, I have developed pedagogical materials and videotaped lectures on more than TEN courses. These educational materials have a Radical Design, based on Islamic Pedagogical Principles. Testing them on students, we find Radically improved educational outcomes. The principles involve teaching students how to DRIVE, and not technicalities of the Engine manufacture. That is, our courses equip students with real life skills of value in solving real world problems. This is based on the Islamic principle of providing BENEFICIAL knowledge, and of avoiding useless knowledge. In addition, teachers and students should make the intention to use knowledge to serve mankind, out of love of God. For more details about these courses, Lookup ONLINE COURSES on  In particular, for  Advanced Macroeconomics, see:  This course is based on integrating history with macro – the goal of the course is to study the real world events which led to the development of macro. Students will learn about the Great Depression, the Gold Standard, and its replacement by the Dollar in the Bretton Woods Agreement. Many aspects of the changing and evolving global economic and financial systems are discussed and studies in the new advanced macro course. The point is to enable the student to understand real world macroeconomics issues, rather than mathematical theories based on bizarre assumptions made just to make it possible to do the calculations with pencil and paper.

End of Part 4 of 4. For the earlier parts, see Part 1: How Islam relates to modern economics?, Part 2: Conflicts between Islam and Economics, Part 3: The Shock and Awe Factor. This concludes the four part lecture. May Allah T’aala make it beneficial for the Ummah of Muslimeen, and for humanity as a whole. Ameen.

Course On Advanced Macroeconomics

Advanced Macroeconomics II:  Preliminaries to STUDY prior to the FIRST Class on Mon 10th Sep 2018 — Teacher: Dr. Asad Zaman, VC PIDE.

Introduction: All required materials and links are available from Google Website: Keynesian Macroeconomics ( This course will be radically different from routine Macroeconomics courses being taught all over the world. It is our ambition to enable the student to understand real world economics like the impact of China on global trade, the petro-dollar, Causes and effects of the Global Financial Crisis, Why IMF promotes austerity even though it harms weak economies, Current BOP Crises in Turkey and Pakistan, and a whole host of related ongoing economic issues. As opposed to this, conventional courses will teach students models and mathematics which have no bearing on reality, and which often teach the wrong lessons about how to understand and manage the economy. As a simple illustration, all major schools of macroeconomic thought agree that money is neutral, at least in the long run. But this idea is not just wrong, it is dramatically wrong, and has catastrophic consequences. Today, the most advanced Macro models (DSGE) have no role for money, banking, and credit, which is why they were blind to the possibility of the Global Financial Crisis. What is worse is that, even after the crisis, these models have not been reformed, and continue to be used for policy making at Central Banks throughout the world.

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Completing the Circle: From GD ’29 to GFC ’07

This post explains the contents of Lecture 8, part II in Advanced Micro I : The lecture explains how the Great Depression of 1929 was caused by (1) excessive money creation by banks, and led to (2) excessive unemployment. Recognition of these problems led to strict regulation of banks to prevent the first and Keynesian economic theory emerged to fix the second problem. Together, these two measures led to rising prosperity for the masses — the 90% — and a dramatic decline in the wealth share of the top 1%. This led to a counter-revolution by the rich and wealthy, as the result of patient and persistent planning, described in  Alkire & Ritchie: Winning Ideas. Both of these measures were scrapped in the Reagan-Thatcher revolution, as financial de-regulation took place, and Keynesian economics was replaced by Chicago School Economics. As a result, the Global Financial Crisis of 2007 occurred, for basically the same underlying reasons as the Great Depression of 1929.  The 22m Video Lecture linked below:

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